-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FjBCfCdLStrR3t2ymsGyHYLaGHklJZv7YSYYCbFzvegZvOPnNMdr3p+ZXflXZqn5 h63cb2Vda5Dd9lZ4GOTv4w== 0001072613-99-000252.txt : 19991117 0001072613-99-000252.hdr.sgml : 19991117 ACCESSION NUMBER: 0001072613-99-000252 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLEAF INC /MA/ CENTRAL INDEX KEY: 0000793604 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042729042 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14713 FILM NUMBER: 99756108 BUSINESS ADDRESS: STREET 1: 62 FOURTH AVE CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 6172900710 MAIL ADDRESS: STREET 1: 62 FOURTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02451 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q [_X_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly period ended September 30, 1999. ------------------- or [___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to _________. COMMISSION FILE NUMBER 0-14713 Interleaf, Inc. ------------------------------------------------------ (exact name of registrant as specified in its charter) MASSACHUSETTS 04-2729042 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification number) 62 FOURTH AVENUE, WALTHAM, MA 02451 (Address of principal executive offices) (Zip Code) (781) 290-0710 (Registrant's telephone number, including area code) Indicate by check [X] whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days Yes [X] No [ ] . APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of November 11, 1999 was 13,008,327. ================================================================================ TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements Consolidated balance sheet at September 30, 1999 and March 31, 1999................ ............................ 3 Consolidated statement of operations for the three and six months ended September 30, 1999 and 1998 .................. 4 Consolidated statement of cash flows for the six months ended September 30, 1999 and 1998 ................................... 5 Notes to consolidated financial statements .................... 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 10 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings .................................... 17 ITEM 2 - Changes in Securities and Use of Proceeds ............ 17 ITEM 4 - Submission of Matters to a Vote of Security Holders .. 17 ITEM 6 - Exhibits and Reports on Form 8-K ..................... 18 SIGNATURES .................................................... 19 -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
SEPTEMBER MARCH 30, 1999 31, 1999 --------- --------- In thousands, except for share and per share amounts (UNAUDITED) ASSETS - ------ Current assets Cash and cash equivalents $ 18,875 $ 16,479 Accounts receivable, net of reserve for doubtful accounts of $1,001 at September 30, 1999 and $1,123 at March 31, 1999 9,704 12,008 Prepaid expenses and other current assets 1,882 1,541 --------- --------- Total Current Assets 30,461 30,028 Property and equipment, net 2,357 2,120 Intangible assets, net 10,150 5,222 Other assets 358 442 --------- --------- Total Assets $ 43,326 $ 37,812 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities Accounts payable $ 1,845 $ 2,224 Accrued expenses 13,584 11,184 Unearned revenue 8,047 11,492 Accrued restructuring 825 953 --------- --------- Total Current Liabilities 24,301 25,853 Long-term restructuring 1,073 1,234 --------- --------- Total Liabilities 25,374 27,087 --------- --------- Redeemable common stock- shares issued and outstanding, none at September 30, 1999 and 469,093 at March 31, 1999 -- 1,496 --------- --------- Shareholders' Equity Preferred stock, par value $.10 per share, authorized 5,000,000 shares: Senior Series B Convertible, shares issued and outstanding, 726,003 at September 30, 1999 and March 31, 1999 73 73 6% Convertible, shares issued and outstanding, none at September 30, 1999 and 1,050 at March 31, 1999 -- -- Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and outstanding, 12,432,936 at September 30, 1999 and 9,913,209 at March 31, 1999 124 99 Additional paid-in capital 104,662 94,795 Retained earnings (accumulated deficit) (86,302) (85,197) Cumulative translation adjustment (605) (541) --------- --------- Total Shareholders' Equity 17,952 9,229 --------- --------- Total Liabilities and Shareholders' Equity $ 43,326 $ 37,812 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS -3- INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 -------- -------- -------- -------- In thousands, except for per share amounts (UNAUDITED) (UNAUDITED) ----------- ----------- Revenues: Products $ 3,645 $ 1,658 $ 6,712 $ 3,885 Maintenance 5,060 5,168 10,155 11,016 Services 4,887 3,184 9,731 6,117 -------- -------- -------- -------- Total revenues 13,592 10,010 26,598 21,018 -------- -------- -------- -------- Costs of Revenues: Products 685 636 1,201 1,272 Maintenance 724 751 1,515 1,576 Services 4,939 2,970 9,571 5,667 -------- -------- -------- -------- Total costs of revenues 6,348 4,357 12,287 8,515 -------- -------- -------- -------- Gross margin 7,244 5,653 14,311 12,503 -------- -------- -------- -------- Operating expenses: Selling, general and administrative 6,473 5,393 12,275 10,363 Research and development 2,153 2,059 3,216 3,832 Purchased in-process research and development -- 498 -- 498 -------- -------- -------- -------- Total operating expenses 8,626 7,950 15,491 14,693 -------- -------- -------- -------- Income (loss) from operations (1,382) (2,297) (1,180) (2,190) Other income 5 244 172 391 -------- -------- -------- -------- Income (loss) before income taxes (1,377) (2,053) (1,008) (1,799) Provision for income taxes -- 25 97 25 -------- -------- -------- -------- Net income (loss) (1,377) (2,078) (1,105) (1,824) Dividends on preferred stock -- (518) (2) (1,092) -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ (1,377) $ (2,596) $ (1,107) $ (2,916) ======== ======== ======== ======== Income (loss) per share: Basic $ (0.12) $ (0.42) $ (0.10) $ (0.47) ======== ======== ======== ======== Diluted $ (0.12) $ (0.42) $ (0.10) $ (0.47) ======== ======== ======== ======== Shares used in computing basic income (loss) per share 11,856 6,240 11,481 6,183 ======== ======== ======== ======== Shares used in computing diluted income (loss) per share 11,856 6,240 11,481 6,183 ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -4- INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOW
SIX MONTHS ENDED SEPTEMBER 30 ----------------------- 1999 1998 -------- -------- (UNAUDITED) In thousands Cash Flows from Operating Activities: Net income $ (1,105) $ (2,316) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization expense 1,520 1,377 Purchased in-process research & development -- 498 Changes in assets and liabilities: Decrease in accounts receivable, net 2,478 3,926 (Increase) decrease in other assets (2,799) 468 Increase (decrease) in accounts payable and accrued expenses 1,854 (378) Decrease in unearned revenue (3,519) (3,793) Decrease in other liabilities (282) (1,298) Other, net -- (84) -------- -------- Net cash provided by (used in) operating activities (1,853) 1,600 -------- -------- Cash Flows from Investing Activities: Capital expenditures (780) (414) Acquisitions (476) (2,731) Capitalized software development costs (1,570) -- -------- -------- Net cash used in investing activities (2,826) (3,145) -------- -------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock 7,181 -- Dividends paid -- (251) -------- -------- Net cash provided by (used in) financing activities 7,181 (251) -------- -------- Effect of exchange-rate changes on cash (106) 671 -------- -------- Net increase (decrease) in cash and cash equivalents 2,396 (4,325) Cash and cash equivalents at beginning of period 16,479 21,112 -------- -------- Cash and cash equivalents at end of period $ 18,875 $ 16,787 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -5- INTERLEAF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are collectively referred to as the "Company." The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. 2. RECENTLY ISSUED ACCOUNTING STANDARDS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133). FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (April 1, 2001 for the Company). FAS 133 requires that all derivative instruments be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company believes the adoption of FAS 133 will have no material impact to its operating results or financial position. -6- 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months ended Six Months ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- In thousands, except for per share amounts NUMERATOR: Net income (loss) $ (1,377) $ (2,078) $ (1,105) $ (1,824) Preferred Stock Dividends: Senior Series C convertible -- (126) -- (252) Senior Series D convertible -- (56) (2) (168) Preferred Stock Deemed Dividend: Senior Series D convertible -- (336) -- (672) -------- -------- -------- -------- -- (518) (2) (1,092) -------- -------- -------- -------- Numerator for basic and diluted income (loss) per share: Income (loss) available to common stockholders $ (1,377) $ (2,596) $ (1,107) $ (2,916) ======== ======== ======== ======== DENOMINATOR: Denominator for basic and diluted income (loss) per share: Weighted average shares 11,856 6,240 11,481 6,183 ======== ======== ======== ======== Basic income (loss) per share $ (0.12) $ (0.42) $ (0.10) $ (0.47) ======== ======== ======== ======== Diluted income (loss) per share $ (0.12) $ (0.42) $ (0.10) $ (0.47) ======== ======== ======== ========
For the three and six months ended September 30, 1999, potential common shares of 1,642 and 1,510, respectively, were excluded from the computation of diluted earnings per share because the Company had a net loss applicable to common shareholders and the effect would have been antidilutive. For the three and six months ended September 30, 1998, potential common shares of 3,488 and 3,407, respectively, were excluded from the computation of diluted earnings per share because the Company had a net loss applicable to common shareholders, and the effect would have been antidilutive. As previously reported in the Company's Annual Report on Form 10-K, the Company has restated its fiscal 1999 results of operations to reflect a reduction in the amount of purchased in-process research and development charged to expenses. As a result of this restatement, the Company's previously reported net losses applicable to common shareholders for the second quarter and for the six months ended September 30, 1998 of $3.1 million and $3.4 million, respectively, were reduced to $2.6 million and $2.9 million, respectively. The Company's previously reported basic and diluted loss per share of $.49 and $.55 for the second quarter and six months ended September 30, 1998, respectively, were reduced to $.42 and $.47, respectively. -7- 4. ACQUISITIONS Effective April 7, 1999, the Company acquired certain assets and assumed certain liabilities of Texcel International AB, Texcel Research, Inc. and Texcel (UK) Limited (collectively, "Texcel"). Texcel provided software and services to corporations and government agencies that depend on information access and efficient reuse of that information for competitive advantage. The Company paid cash of $.5 million, issued 250,000 shares of common stock valued at $.8 million, and issued warrants to purchase 200,000 shares of common stock valued at $.1 million. In addition, the Company made a loan of $.3 million to Texcel, which was subsequently repaid. In connection with the acquisition, the net liabilities to provide support services to Texcel customers, partially offset by the fair value of fixed assets acquired, were recorded at $.1 million. The Company also recorded $1.5 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 5 years. Effective September 1, 1999, the Company purchased 100% of the outstanding common shares of Docu-Net Inc. ("Docu-Net"). Docu-Net provides subcontracting and outsourcing services for the development, management and distribution of information. The acquisition has been accounted for as a purchase business combination and, accordingly, the operating results of Docu-Net have been included in the Consolidated Statement of Operations since the date of the acquisition. The Company issued common stock valued at $.1 million as payment for the purchase of Docu-Net, and depending upon certain financial contingencies, the Company may be obligated to pay an additional amount in cash or in common stock on or before October 3, 2000. In connection with the acquisition, the Company recorded the assets and liabilities of Docu-Net at their fair values. The Company also recorded $.1 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 4 years. Effective September 1, 1999, the Company acquired 100% of the outstanding common shares of Horizon Interactive, Inc. ("Horizon"). Horizon provides subcontracting and outsourcing services for the development, management and distribution of information. The acquisition has been accounted for as a purchase business combination and, accordingly, the operating results of Horizon have been included in the Consolidated Statement of Operations since the date of acquisition. As payment for the purchase of Horizon, the Company issued common stock valued at $.2 million, is obligated to pay an additional $.1 million on October 1, 2000, and depending upon certain financial contingencies, the Company may be obligated to pay up to $.7 million, in cash or in common stock on or before October 15, 2000. In connection with the acquisition of Horizon, the Company recorded the assets and liabilities of Horizon at their fair values. The Company also recorded $.3 million of goodwill, which will be amortized over an estimated useful life of 4 years. 5. SEGMENT INFORMATION The Company develops and markets software products and services which address two distinct markets, one of which is referred to as "e-publishing" or "complex publishing", and the other of which is referred to as "e-content" or "content management". The Company's traditional or "e-publishing" solutions are used in the creation, publication, management and distribution of electronic and paper documents, and are targeted at the complex publishing market. Interleaf's "e-content solutions" are comprised of new software products, named BladeRunner, Information Manager, Quicksilver and Panorama, and related services, and are targeted at the content management market. During fiscal 1999, Interleaf realized that its e-publishing and e-content products and services require different resources, strategies and investments in order to be successful, and that the measurement of success is very different for each. As a result, during the first quarter of fiscal -8- 2000, the Company dedicated separate development, sales and support resources to its e-publishing and e-content divisions. Consistent with the separation of resources for these two divisions, the Company has changed its reporting segments to separately reflect results from the e-publishing and e-content divisions. The following summarizes the results of the Company's e-publishing and e-content divisions for the three and six months ended September 30, 1999 and 1998, respectively.
THREE MONTHS ENDED -------------------------------------------------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL -------- -------- -------- -------- -------- -------- Products $ 1,644 $ 2,001 $ 3,645 $ 1,658 $ -- $ 1,658 Maintenance 4,925 135 5,060 5,168 -- 5,168 Services 4,222 665 4,887 3,184 -- 3,184 -------- -------- -------- -------- -------- -------- Total revenues $ 10,791 $ 2,801 $ 13,592 $ 10,010 $ -- $ 10,010 ======== ======== ======== ======== ======== ======== Income (loss) from operations $ 1,479 $ (2,861) $ (1,382) $ (2,297) $ -- $ (2,297) ======== ======== ======== ======== ======== ======== SIX MONTHS ENDED -------------------------------------------------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL -------- -------- -------- -------- -------- -------- Products $ 3,648 $ 3,064 $ 6,712 $ 3,885 $ -- $ 3,885 Maintenance 9,925 230 10,155 11,016 -- 11,016 Services 8,619 1,112 9,731 6,117 -- 6,117 -------- -------- -------- -------- -------- -------- Total revenues $ 22,192 $ 4,406 $ 26,598 $ 21,018 $ -- $ 21,018 ======== ======== ======== ======== ======== ======== Income (loss) from operations $ 3,004 $ (4,184) $ (1,180) $ (2,190) $ -- $ (2,190) ======== ======== ======== ======== ======== ========
The following are reconciliations to corresponding totals in the accompanying consolidated statements:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Income (loss) for reportable segments $ (1,382) $ (2,297) $ (1,180) $ (2,190) Non-operating income (47) 37 28 33 Interest income, net 52 207 144 358 ---------- ---------- ---------- ---------- Income (loss) before income taxes $ (1,377) $ (2,053) $ (1,008) $ (1,799) ========== ========== ========== ==========
6. SHAREHOLDER'S EQUITY Effective August 13, 1999, Interleaf entered into an agreement with certain existing stockholders, new investors, and the CEO of Interleaf under which each of them agreed to purchase and Interleaf agreed to sell a total of 940,333 shares of common stock at a purchase price of $7.50 per share. On September 3, 1999, Interleaf completed the sale and issuance of 940,333 shares to the purchasers. -9- 7. CREDIT AGREEMENT At September 30, 1999 and March 31, 1999, the Company had outstanding letters of credit aggregating $.8 and $.9 million, respectively, expiring between December 31, 1999 and October 31, 2001. These letters of credit guarantee payments on two leases and future payments for an acquisition that occurred in fiscal 1999. The letters of credit are secured by equal amounts of cash and are reduced by the amount of the respective payments. 8. COMPREHENSIVE INCOME (LOSS) Comprehensive income for the period is equal to net income plus "other comprehensive income," which, for the Company, consists of the change in cumulative translation adjustments during the period. Total comprehensive losses for the three and six months ended September 30, 1999 were $1.3 million and $1.2 million respectively. For the three and six months ended September 30, 1998, total comprehensive losses were $1.9 million, and $1.6 million, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- RESULTS OF OPERATIONS OVERVIEW The Company reported a net loss of $1.4 million on total revenues of $13.6 million for its second quarter and a net loss of $1.1 million on total revenues of $26.6 million for the six months ended September 30, 1999. This compares with a net loss of $2.1 million on total revenues of $10.0 million and a net loss of $1.8 million on total revenues of $21.0 million for the same periods of the prior year before the payment of dividends on preferred stock. The Company recorded preferred stock dividends of $.5 million and $1.1 million for the second quarter and six months ended September 30, 1998, respectively. Therefore, after dividends on preferred stock, the Company's net loss applicable to common stockholders was $2.6 million and $2.9 million for the second quarter and six months ended September 30, 1998, respectively. As previously reported in the Company's Annual Report on Form 10-K, the Company has restated its fiscal 1999 results of operations to reflect a reduction in the amount of purchased in-process research and development charged to expenses. As a result of this restatement, the Company's previously reported net losses applicable to common shareholders for the second quarter and for the six months ended September 30, 1998 of $3.1 million and $3.4 million, respectively, were reduced to $2.6 million and $2.9 million, respectively. The Company's previously reported basic and diluted loss per share of $.49 and $.55 for the second quarter and six months ended September 30, 1998, respectively, were reduced to $.42 and $.47, respectively. The increases in total revenues of $3.6 million and $5.6 million in the second quarter and first six months of fiscal 2000 compared with the same periods of fiscal 1999 were primarily due to increases in product revenue from the sales of the Company's new e-content products and the inclusion of services revenue from PDR Automated Systems and Publications, Inc. ("PDR") in fiscal 2000. Initial product sales of the Company's e-content products occurred during the first quarter of fiscal 2000 and PDR was acquired on August 31, 1998 and, therefore, only one month of PDR revenue was included in the second quarter of fiscal 1999 results of operations. Total revenues for fiscal 2000 also included the results of Interleaf Italia Srl ("Interleaf Italia"), a majority interest in which was acquired in the fourth quarter of fiscal 1999. There were no revenues from Interleaf Italia included in the second quarter or first six months of fiscal 1999. -10- Effective April 7, 1999, the Company acquired certain assets and assumed certain liabilities of Texcel International AB, Texcel Research, Inc. and Texcel (UK) Limited (collectively, "Texcel"). Texcel provided software and services to corporations and government agencies that depend on information access and efficient reuse of that information for competitive advantage. The Company paid cash of $.5 million, issued 250,000 shares of common stock valued at $.8 million, and issued warrants to purchase 200,000 shares of common stock valued at $.1 million. In addition, the Company made a loan of $.3 million to Texcel, which was subsequently repaid. In connection with the acquisition, the net liabilities to provide support services to Texcel customers, partially offset by the fair value of fixed assets acquired, were recorded at $.1 million. The Company also recorded $1.5 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 5 years. Effective September 1, 1999, the Company purchased 100% of the outstanding common shares of Docu-Net Inc. ("Docu-Net"). Docu-Net provides subcontracting and outsourcing services for the development, management and distribution of information. The acquisition has been accounted for as a purchase business combination and, accordingly, the operating results of Docu-Net have been included in the Consolidated Statement of Operations since the date of the acquisition. The Company issued common stock valued at $.1 million as payment for the purchase of Docu-Net, and depending upon certain financial contingencies, the Company may be obligated to pay an additional amount in cash or in common stock on or before October 3, 2000. In connection with the acquisition, the Company recorded the assets and liabilities of Docu-Net at their fair values. The Company also recorded $.1 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 4 years. Effective September 1, 1999, the Company acquired 100% of the outstanding common shares of Horizon Interactive, Inc. ("Horizon"). Horizon provides subcontracting and outsourcing services for the development, management and distribution of information. The acquisition has been accounted for as a purchase business combination and, accordingly, the operating results of Horizon have been included in the Consolidated Statement of Operations since the date of acquisition. As payment for the purchase of Horizon, the Company issued common stock valued at $.2 million, is obligated to pay an additional $.1 million on October 1, 2000, and depending upon certain financial contingencies, the Company may be obligated to pay up to $.7 million in cash or in common stock on or before October 15, 2000. In connection with the acquisition of Horizon, the Company recorded the assets and liabilities of Horizon at their fair values. The Company also recorded $.3 million of goodwill, which will be amortized over an estimated useful life of 4 years. During fiscal 1999, Interleaf realized that its e-publishing and e-content lines of business require different resources, strategies and investments in order to be successful, and that the measurement of success is very different for each. As a result, during the first quarter of fiscal 2000, the Company separated these lines of business into two divisions and dedicated separate development, sales and support resources. Consistent with the separation of resources for these two divisions, the Company has changed its reporting segments to separately reflect results from the e-publishing and e-content divisions. REVENUES PRODUCT: Total product revenue increased $2.0 million (120%) and $2.8 million (73%) for the second quarter and six months ended September 30, 1999, respectively, compared with the same periods in fiscal 1999. The increase is primarily due to $2.0 million in sales from the Company's new e-content products, BladeRunner and Information Manager, a product acquired from Texcel in the first quarter of fiscal 2000. Information Manager has been incorporated into BladeRunner, and is also sold separately on a limited basis. Additionally, the Company has introduced the Quicksilver suite of products, an XML enabling publishing technology which provides the Company's existing complex publishing customers with a migration path to enterprise wide applications of XML such as BladeRunner. Quicksilver was -11- introduced during the second quarter of fiscal 2000, and is sold on an annual subscription basis under which the customer will receive all upgrades, maintenance and support offered during each year for which the subscription license fee is paid. Existing customers are offered the choice of continuing with their e-publishing products and associated maintenance at a discount, or migrating to Quicksilver subscriptions. The election by existing customers to migrate to Quicksilver subscription licenses will therefore reduce the maintenance revenue for the e-publishing segment and will increase subscription revenue for the e-content segment. MAINTENANCE: Total maintenance revenue decreased by $.1 million (2%) and $.9 million (8%) in the second quarter and six months ended September 30, 1999, respectively, compared with the same periods of the prior year. Maintenance revenue is primarily attributed to the Company's e-publishing segment, which generated 97% and 98% of all maintenance revenue for the second quarter and six months ended September 30, 1999. The declines in maintenance revenue reflect the continued consolidation in the industries served by the e-publishing segment and the continued migration of e-publishing customers to competing products. Future maintenance revenue from the e-publishing segment is likely to decline as the Company encourages existing customers to migrate to Quicksilver subscriptions. Future maintenance revenue growth is dependent on the Company's ability to increase maintenance contract volume related to the new content management products. SERVICES: Services revenue, consisting of consulting and training revenue, increased by $1.7 million (53%) and $3.6 million (59%) for the second quarter and six months ended September 30, 1999, respectively, compared with the same periods of fiscal 1999. The increases in fiscal 2000 are primarily attributable to the inclusion of revenue from PDR, which contributed $2.0 million and $3.7 million for the second quarter and six months ended September 30, 1999, respectively. In fiscal 1999, only one month of PDR revenue, totaling $.5 million, was included in these periods as PDR was acquired August 31, 1998. FISCAL 2000: During fiscal 1999, the Company developed and released several upgrades to its traditional products. In the first quarter of fiscal 2000, the Company released the first commercially available version of its content management software product, BladeRunner. The Company also acquired a content management product from Texcel, named Information Manager, which provided complementary functionality. Information Manager has been incorporated into BladeRunner, and is also sold separately on a limited basis. In the second quarter of fiscal 2000, the Company introduced the Quicksilver suite of products ("Quicksilver"), an XML enabling publishing technology which provides the Company's existing complex publishing customers with a migration path to enterprise wide applications of XML, such as BladeRunner. The Company will market Quicksilver on an annual subscription basis whereby a customer pays an annual subscription license fee and is entitled to upgrades and telephone support during the subscription period. Growth in revenues during fiscal 2000 will be largely dependent on the introduction and customer acceptance of the new and enhanced software products released in fiscal 1999 and 2000, and the Company's success in leveraging software products with services to provide content management solutions to its customers, improving sales force productivity and the effectiveness of the Company's investment in marketing and lead generation programs. COSTS OF REVENUES Cost of product revenues includes amortization of capitalized software development costs, product media, documentation materials, packaging and shipping costs, and royalties paid for licensed technology. Cost of product revenues in the second quarter of fiscal 2000 was comparable with the same period of fiscal 1999. Cost of product revenues for the six months ended September 30, 1999 decreased by $.1 million compared to the same period of the prior year. In the second quarter of fiscal 2000, increased amortization of capitalized research and development costs were partially offset by decreases in royalty expense compared with the prior year. For the six month period of fiscal -12- 2000, decreased royalty expense combined with reduced costs of outsource manufacturing more than offset the increase in amortization of capitalized research and developments costs. The cost of product revenue for the first and second quarter of fiscal 1999 included start up costs incurred when changing outsource manufacturers. Costs of maintenance revenues for the second quarter and six months ended September 30, 1999 were comparable to the same periods of the prior year. Savings from reduced staffing in the Company's e-publishing business segment were offset by the additional personnel acquired from Texcel and personnel hired to develop, support and market e-content products. Costs of services revenue increased by $2.0 million (66%) and $3.9 million (69%) in the second quarter and six months ended September 30, 1999, respectively. The increase is attributable to the acquisition of PDR in the second quarter and Interleaf Italia in the fourth quarter of fiscal 1999. The lower gross margins in the services business reflect the higher costs of attracting personnel and the discounted pricing being offered by the Company to gain market share in the e-content marketplace OPERATING EXPENSES Selling, general and administrative ("SG&A") expenses increased by $1.1 million and $1.9 million in the second quarter and six months ended September 30, 1999 compared with the same periods of the prior year. The increases are primarily attributable to the amortization of goodwill and intangible assets of $.2 million and $.4 million, respectively, related to the Company's fiscal 1999 and 2000 acquisitions and the incremental SG&A expenses incurred by Interleaf Italia and PDR of $.3 million and $.6 million, respectively. The remaining increase is due to additional selling and marketing expenses associated with the launching of the Company's e-content division. Research and Development ("R&D") expenses increased by $.1 million in the second quarter of fiscal 2000 compared with the same period of the prior year. As a percent of revenue, R&D expenses decreased to 16% in the second quarter of fiscal 2000 from 21% in the second quarter of fiscal 1999. The decrease in R&D expense as a percentage of revenue in the second quarter of fiscal 2000 compared with the same period of fiscal 1999, is due to a reduction in engineering contractor costs as certain phases of development projects were completed. In the first six months of fiscal 2000, the Company's total R&D expenses, including capitalized software development costs, were $4.8 million, representing 18% of revenues. This consisted of $3.2 million charged directly to R&D expenses and $1.6 million of capitalized software development costs. In the first six months of fiscal 1999, the Company's product development and engineering expenses were $3.8 million, representing 18% of revenues. There were no software development costs capitalized in the first six months of fiscal 1999, and no such costs were capitalized in the second quarter of fiscal 2000. The increase in R&D expenses in fiscal 2000 is attributable to the continuing development and enhancements of the Company's new content management product, BladeRunner, and to the acquisition of certain assets from Texcel, which increased the Company's engineering personnel and related expenses. LIQUIDITY AND CAPITAL RESOURCES The Company had $18.9 million of cash and cash equivalents at September 30, 1999, an increase of $2.4 million from March 31, 1999. The increase was mainly attributable to the net proceeds received from a private placement of the Company's common stock of $6.6 million and the proceeds from exercises of stock warrants and employee stock options of $.6 million, which was partially offset by capitalized software development costs of $1.6 million, cash used in operating activities to support revenue growth of $1.8 million, cash used for acquisitions of $.5 million, cash used for capital expenditures of $.8 million and the effect of exchange rate changes on cash of $.1 million. -13- At September 30, 1999 and at March 31, 1999, the Company had outstanding letters of credit aggregating $.8 and $.9 million, respectively, expiring between December 31, 1999 and October 31, 2001. These letters of credit guarantee payments on two leases and the future payments for an acquisition that occurred in fiscal 1999. The letters of credit are secured by equal amounts of cash and are reduced by the amount of the respective payments. At September 30, 1999 and March 31, 1999, the Company had approximately $1.1 million of cash restricted for potential payment of a withholding tax assessment on its German subsidiary related to payments remitted to the United States from Germany in 1990. The Company is appealing this assessment. The Company believes its current cash balances and cash generated from operations will be sufficient to meet the Company's liquidity needs for fiscal 2000, including restructuring payments and increases in investment in the development, marketing and promotion of its e-content products. However, the Company is considering making additional large increases in its investments in the development, marketing and promotion of its e-content solutions, and if such additional investments are to be made it would be necessary for the Company to raise additional capital. The net tangible asset listing criteria for the NASDAQ National Market and the Company's financial condition dictate that any such financing would be an equity financing. However, the Company cannot guarantee that such financing can be obtained or that it can be obtained on commercially reasonable terms or without incurring substantial dilution to existing stockholders. YEAR 2000 Background - ---------- Some computers, software and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of the systems do not properly recognize a year that begins with "20" instead of "19". These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millenium Bug" or "Year 2000 problem". Interleaf Approach - ------------------ Interleaf established a Year 2000 project team to address all aspects of the Year 2000 problem in each area of its business. The project team has four areas of focus, each with its own project manager. These four areas are: (1) the software that is created by Interleaf and sold to customers; (2) internal business systems; (3) the hardware and operating system software used by employees; and (4) facilities and critical vendors other than computer suppliers. Interleaf Created Products - -------------------------- ASSESSMENT: In 1997 Interleaf began to focus on the Year 2000 problem regarding its software products created for sale to customers. Products that generate the most revenue or were most likely to experience Year 2000 problems were prioritized for testing and repair. The assessment of these products was completed in early 1998 and the repair process begun. The Company made the decision to discontinue sales and support for certain low volume products and computer platforms. CUSTOMER COMMUNICATIONS: The Company sent a description of its Year 2000 product strategy to all of its maintenance customers. It created and is maintaining a Year 2000 product status page as part of its web site. Interleaf distributed a mailing to the entire maintenance base describing the status of the year 2000 releases and included a list of retired products and platforms in the fourth quarter of calendar year 1998. -14- STATUS: All major products have been modified and tested for the computer platforms that will be supported beyond the year 2000. Upgrades which correct any known Year 2000 problems with those products have been made available at no extra charge to the customers with current maintenance contracts. Year 2000 upgrades were all completed for supported products by the end of the second calendar quarter of 1999 for all major products and platforms. The extent of the changes required ranged from simple recompilation with Year 2000 compliant operating systems to extensive modifications. Testing and repair of generally available layered applications and low volume products was completed by September 30, 1999. The layered applications did not require significant modifications. In addition, the Company created layered applications under specific contracts with specific customers, and not for general re-sale. The Company expects that those applications which operate in conjunction with non-compliant versions of the Company's RDM product may experience major problems and even complete failure on January 1, 2000. The Company has notified customers who are using non-compliant versions of RDM of this risk. The Company offers a Year 2000 compliant version of RDM to those RDM customers who have subscribed for maintenance. However, significant development may be required in order for those applications to be ported to work with the RDM upgrade. The Company believes that it has no obligation to modify those applications to address the Year 2000 problem or to work with the year 2000 compliant version of RDM, unless the particular customers engage Interleaf to fix those problems. All products under development are being developed to be Year 2000 compliant. The Company received notices from a small number of customers regarding non-compliance of unsupported products, and to date the Company has successfully resolved those issues without material cost. The Company cannot predict whether or not claims may be asserted with respect to non-supported products, either due to a breakdown in the customer communications process, to contractual obligations not understood by its customer or by Interleaf, or for other reasons. Internal Business Systems - ------------------------- Interleaf contracted an independent third party to perform Year 2000 compliance testing on its critical internal corporate business systems. Some problems were identified and appropriate modifications were made. The systems were then re-tested and performed successfully. The software vital to corporate operations has been proven by the independent third party to function without problems related to the millenium change. The Company has investigated and received assurances from the vendors that all critical internal business software in North America and Europe is Year 2000 ready. The operating system and database for the Company's worldwide customer support information support system are not Year 2000 compliant. The Company is in the process of correcting this system, and expects to have the Year 2000 fixes complete by December 10, 1999. The Company has developed a contingency plan in the event that this system experiences Year 2000 problems, and believes that such failure would not have a materially adverse impact on the Company. The assessment phase is now underway for business software used in Japan and Australia. The Company intends to have compliance assured before the year 2000, but this deadline may not be met. The Company does not believe that the failure to reach this deadline would not have a material adverse impact on the Company. Hardware and Operating Systems Software - --------------------------------------- Assessment of the systems used by employees began in early 1997 and has been completed. The Company developed a plan to upgrade or replace all critical systems used by employees, including all -15- hardware in the enterprise from servers to laptops. The upgrade/replacement process began in early 1998 and is approximately 90% complete (100% complete with respect to critical systems). The entire process is expected to be complete by the end of November 1999. Facilities and Critical Vendors - ------------------------------- In the fourth calendar quarter of 1998 Interleaf began discussions with facility management of its leased office spaces to ensure that the proper actions are taken to avoid disruption of productivity in all Interleaf facilities. Two major elements of Interleaf's business, payroll and product manufacturing, are outsourced. Interleaf has been assured by those service providers that operation of these critical business areas will not be affected by the millenium change. Cost - ---- The costs of the Interleaf Year 2000 efforts are being funded out of cash flow from operations. The total cost associated with the required modifications and upgrades associated with the Year 2000 projects is not expected to be material to the Company's financial position. The process of repairing and testing the software that Interleaf creates for sale has been done with existing budgeted personnel. The Year 2000 testing equipment and lab environment have been created using existing equipment and space. The capital costs associated with the upgrade and replacement of the Company's corporate and field office computing environments are expected to be $400,000. These expenditures began in late 1997, were 90% incurred by the end of September 1999 and will be completed during the fourth calendar quarter of 1999. Software maintenance costs attributable to the Year 2000 will be approximately $50,000. Labor associated with this process of implementing the internally used systems was provided by existing budgeted personnel. Risk - ---- Interleaf has made a significant effort to address its Year 2000 issues. At this time, there are no identifiable significant risks associated with its Year 2000 readiness, although there is a risk that unanticipated problems may arise. The Company has prepared a contingency plan to address reasonably likely worst case business operations scenarios. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements concerning the Company's performance and business operations. The Company wishes to caution readers of this Quarterly Report on Form 10-Q that actual future results may differ materially from the projections or suggestions made in such forward-looking statements. Factors which might cause actual future results to differ materially from those projected in the forward-looking statements contained herein include the following: The Company's ability to continue to develop and market new and enhanced products and services, particularly the Company's content management products and services; delays in the development and introduction of such new and enhanced products and services; failure to achieve customer and market acceptance of the Company's new and enhanced products and services; delays in the growth and development of market demand for content management software products; the failure of the market for multi-device portals and Web sites to grow as expected; difficulties in designing and developing the X-WAP application on time and with the required quality; changes in the XML and XSL language and standards or the emergence of new competing technologies; and the development of applications which are competitive with BladeRunner, Information Manager, Quicksilver or X-WAP by other companies, including telecommunications companies, having far greater resources than the Company; the Company's inability to raise additional -16- capital as may be necessary to effectively develop, market and promote its new e-content products; inability to increase maintenance contract revenue related to content management products; inability to increase revenue from consulting and training contracts with respect to the introduction of new products; inability to improve sales force productivity; the Company's ability to keep pace with the rapid technological change in its industry and compete with companies which have greater market penetration and greater financial, technical and marketing resources; failure to adequately protect the Company's intellectual property; inability to establish or maintain strategic relationships with companies that have presence and expertise in the markets and market segments targeted by the Company; the inability of the Company to make acquisitions of, or significant investments in, businesses that offer complementary products and technologies; and failure to integrate the operations, information systems and personnel of any acquired businesses. Certain of these and other factors which might cause actual results to differ materially from those projected are more fully set forth under the caption "Risk Factors" on pages 20-22 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- There are no material legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- (c) Effective August 13, 1999, Interleaf entered into an agreement with certain existing stockholders, new investors, and the CEO of Interleaf to sell them a total of 940,333 shares of common stock at a purchase price of $7.50 per share. On September 3, 1999, Interleaf completed the sale and issuance of 940,333 shares to the purchasers, and realized $6,592,102 in proceeds after expenses and commissions. The sales were made in reliance on the exemption provided by Rule 506 under the Securities Act of 1933. Adams, Harkness & Hill, Inc. and Stonegate Securities, Inc. each acted as independent sales agent with respect to a portion of the total sales, for which they each received a 6% commission. The shares were registered for re-sale on a Form S-3 promptly after issuance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Interleaf, Inc. held its Annual Meeting of Stockholders on September 8, 1999. At the meeting, the stockholders approved (a) the election of two Class III directors each to hold office until the 2002 Annual Meeting of Stockholders and (b) the ratification of the selection of PriceWaterhouseCoopers L.L.P. as Interleaf's independent auditors for the year ending March 31, 2000. -17- a) Election of Directors: ====================== ================= ================= NOMINEE FOR WITHHELD - ---------------------- ----------------- ----------------- Frederick B. Bamber 9,493,252 205,063 - ---------------------- ----------------- ----------------- David A. Boucher 9,492,402 205,913 ====================== ================= ================= b) Ratification of the selection of PriceWaterhouseCoopers L.L.P. as Interleaf's independent auditors for the year ending March 31, 2000: ================= ================= ================= ================= FOR AGAINST ABSTAIN - ----------------- ----------------- ----------------- ----------------- APPROVAL 9,401,823 5,792 290,700 ================= ================= ================= ================= ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.1 Restated Articles of Organization of the Company, as amended (incorporated herein by reference to the applicable Exhibit in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 3.2 By-Laws of the Company, as amended (incorporated herein by reference to the applicable Exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994) 4 Specimen Certificate for Shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999) 10.1 Stock Purchase Agreement among Interleaf, Horizon Interactive, Inc., and Steven Imke, Dale J. Chavez and Randy Welsch, dated September 29, 1999 (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-3 dated October 22, 1999, File Number 333-89117) 10.2 Stock Purchase Agreement among Interleaf, Docu-Net, Inc., and Daniel Schweitzer and Larry Scott, dated September 29, 1999 (incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-3 dated October 22, 1999, File Number 333-89117) 11 Computation of Earnings Per Share (included as Note 3 to Financial Statements) 27 Financial Data Schedule -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 15, 1999 /s/ Peter J. Rice -------------------------------------------- Peter J. Rice, Vice President of Finance and Administration and Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) -19- EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages 3 and 4 of the Company's Form 10-Q for the quarterly period ended September 30,1999, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS MAR-31-2000 SEP-30-1999 18,875 0 10,705 1,001 341 30,461 12,652 (10,295) 43,326 24,301 0 0 73 124 17,755 43,326 6,712 26,598 1,201 11,086 15,491 0 0 (1,008) 97 (1,105) 0 0 0 (1,105) (0.10) (0.10)
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